Blog: A 'not unexpected' downgrade for West Penn Allegheny

Fitch Ratings lowered its already low rating for West Penn Allegheny Health System to CCC from B+, a multi-notch drop, as the chance of debt restricting grows and an acquisition by Highmark looks less certain.

The news came as the financially strapped health system and Highmark, a Pittsburgh insurer, went before a Pennsylvania judge for a hearing on West Penn Allegheny's recent bid to back out of its acquisition by Highmark in order to search for another buyer. The system announced the deal was off in late September and Highmark quickly sued to stop West Penn Allegheny from talking to new suitors.

“The hospital's recent notice to Highmark terminating the affiliation agreement and its stated intention to pursue other affiliation opportunities at best signal an elevated and material possibility that the Highmark affiliation will not close by the April 30, 2013 implementation deadline, leaving WPAHS with limited options for addressing its precarious financial situation,” said Fitch analysts announcing the downgrade.

West Penn Allegheny told bond investors (PDF) the rating action “was not unexpected” after Fitch said in June that the system's B+ rating hinged on its acquisition by Highmark.

Highmark agreed to invest up to $400 million in the system and has poured $200 million into West Penn Allegheny—half of it loans—since the deal was announced in June 2011. It's unclear what will happen to that investment, Fitch said in its downgrade notice. West Penn Allegheny has said it can keep the money under terms of the deal, because Highmark violated conditions of the agreement. The insurer rejected the system's claims and demanded $200 million from West Penn Allegheny in court filings.

Fitch analysts said West Penn Allegheny's credit “remains volatile” and could change based on the outcome of lawsuits, financial performance of West Penn Allegheny, talks with Highmark and possible government intervention.